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Israel’s economy is sound but it urgently needs to address productivity, inequality and poverty

31/1/16 – Israel’s economy has strong fundamentals, but the country needs to address productivity, inequality and poverty if it wants to improve well-being and reduce socio-economic divides, according to the OECD’s latest Economic Survey of Israel.

The release coincided with the fifth anniversary of Israel’s accession to the OECD. The Survey was presented by OECD Secretary-General, Angel Gurría, to Prime Minister Benjamin Netanyahu during a cabinet meeting today. The Survey says that improving productivity and raising living standards will require strengthening competition and efficiency in the domestic economy. The OECD report also highlights that boosting investment in infrastructure and promoting skills, particularly among disadvantaged groups can both enhance social cohesion and raise long-term growth.

The OECD is also today releasing a study entitled Measuring and Assessing Well-Being in Israel. This report will complement an Israeli government-led initiative to publish information that helps improve measurement of “what matters most to people.” The report shows that, while Israel performs well and is among the best in the OECD in terms of life satisfaction, health status and educational attainment, it has poor outcomes compared to OECD averages in areas such as poverty, housing and air quality. Additionally, Israel has a high level of inequality, with the Israeli Arab and Haredi populations experiencing higher than average rates of poverty, and lower levels of labour force participation and educational attainment than is the case for secular Jews. This contributes to overall levels of human capital in Israel which are significantly below the OECD average.

“These two reports together provide Israel with a snapshot of the state of its economy and societal well-being’” said Mr. Gurría. “Growth rates have exceeded those in most other OECD countries for more than a decade; employment is rising; inflation is low; and the public finances are in relatively good shape; but, there is homework to do if everyone in Israeli society is to benefit from this strong growth.” (read the speech)

The Economic Survey urges Israel to maintain its current expansionary monetary policy stance and implement further protective measures if risks to the financial system rise, especially from the dynamic housing sector. Israel should also reduce its structural budget deficit, remove inefficient tax expenditures and raise environmental taxes – including by establishing a carbon tax.

In terms of product market reform, Israel should ensure that the planned reduction of the regulatory burden relies on high-quality regulatory impact assessments and should cut tariffs and non-tariff barriers further, in particular by adopting internationally standardised procedures related to phyto-sanitary regulations on food and agricultural goods. Relatively high price levels due to weak competition, in particular in the food sector, impose an especially heavy cost, in terms of living standards, on socioeconomically disadvantaged groups.

The OECD Survey notes that the Israeli banking sector is concentrated and inefficient. Israel should follow through on plans to allow the entry of new competitors in retail banking, in particular by non-banking credit entities, with appropriate consumer protection and financial risk regulation.

To address the weaknesses of an electricity market still dominated by a heavily indebted, publicly owned, vertically integrated company, the OECD suggests turning the Israel Electricity Corporation into a holding company and creating a separate infrastructure operator. It also suggests creating independent regulators with well-defined mandates in the telecoms, postal services and gas sectors.

Poverty is especially high among the elderly in Israel, in part because of low basic pensions. Employment rates for Haredi men and Arab-Israeli women, while improving, remain low. Rising house prices impose an additional affordability burden, increasingly even on the middle class. The OECD recommends streamlining the administrative requirements for planning and building a home, further developing public transport infrastructure to make it easier to live in lower-priced housing areas and promoting labour market participation for those living in remote areas. To reduce elderly poverty, Israel should increase the generosity of basic pensions without creating work disincentives. Additional steps could include increasing education funding for disadvantaged groups, ensuring Haredi schools teach mathematics, science and foreign languages and expanding the earned income tax credit and active labour market policies.